Edited version of private ruling

Authorisation Number: 1011673496495

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Ruling

Subject: Small business Capital Gains Tax (CGT) concessions - 50% reduction.

Question 1

Does the asset satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes

Question 2

Are you able to use the small business 50% active asset reduction for the disposal of the asset under Division 152 of the ITAA 1997?

Answer: Yes

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Taxpayer 1 and taxpayer 2 (you) carried on a business in partnership for a number of years. The partnership ceased in the income year prior to the CGT event.

Taxpayer 1 continued to operate the business during the income year in which the CGT event occurred as a sole trader.

The aggregated turnover of the business in the two income years prior to the CGT event was less than $2 million.

Taxpayer 2 had a net asset value less than $6 million for the income year in which the CGT event occurred.

You each maintained a 50% interest in the property from the date it was purchased until it was sold. It included your residence, a number of sheds, cleared land used in the business and other open space.

There was a lean on the side of one of the sheds which had a roof on it and was used for storage.

You state the sheds and other open spaces were used for the storage of business equipment and vehicles.

The cleared land on the property was used to store cut wood, mulch and wood chippings before they were eventually disposed of.

There was a single point of access to the property, the entrance led to a large loop on the property from which the house was accessed along with the sheds. The loop was created to allow access to the shed by the larger trucks and vehicles which were used by the business.

By reasonable approximation you have determined that the partnership used 65% of the property for business purposes and has been treated as such on the partnership accounts and tax returns. You used 35% of the property as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35,

Income Tax Assessment Act 1997 Division 152,

Income Tax Assessment Act 1997 Section 152-40,

Income Tax Assessment Act 1997 Subdivision 152-A,

Income Tax Assessment Act 1997 Section 328-110,

Income Tax Assessment Act 1997 Division 115,

Income Tax Assessment Act 1997 Section 152-200,

Income Tax Assessment Act 1997 Subdivision 152-C and

Income Tax Assessment Act 1997 Section 152-15.

Further issues for you to consider

We have limited our ruling to the questions raised in your application. There may be related issues that you should consider including:

· 50% CGT discount, and

· Subsequently applying further small business CGT concessions.

You may apply for another ruling on these or any other matters.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Question 1

Active asset test

Under section 152-35 of the ITAA 1997 a CGT asset satisfies the active asset test if:

· you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half the period specified in subsection (2); or

· you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period specified in subsection (2).

Subsection 152-35(2) of the ITAA 1997 specifies the period:

· begins when you acquired the asset; and

· ends at the earlier of:

o the CGT event; and

o if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Section 152-40 of the ITAA 1997 provides a CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

· you; or

· your affiliate; or

· another entity that is connected with you.

Used in the course of carrying on a business

A situation may arise where a CGT asset, such as property, could be used for a number of different purposes. Section 152-40 of the ITAA 1997 does not impose minimum usage requirements for an asset to satisfy the definition of an active asset. Whether an asset is used in the course of carrying on a business is a question of fact and requires an objective consideration of all relevant facts. No one single factor will necessarily be determinative.

Your circumstances

The property included your residence, two sheds, cleared land used in the business and other open space. By reasonable approximation you have determined that the partnership used 65% of the dwelling for business purposes and has been treated as such on the partnership accounts and tax returns. You used 35% of the dwelling as your main residence. You intend to disregard this portion of the capital gain under the main residence exemption. Thus, the remaining 65% of the property must be considered under the active asset test.

The definition of active asset does not require exclusive use of the asset for business purposes. The partnership carried on a business which required plant, vehicles and equipment, the specific assets the business held for use as set out in the facts. The property was used for the storage of these assets. On the basis of the facts provided, it would be reasonable to conclude that the property was used in the carrying on of the business.

The active asset period ended during the income year prior to the CGT event for taxpayer 2. The active asset period ended at the CGT event for taxpayer 1. Each of you have owned the asset for less than 15 years, however, in both your circumstances it was an active asset for more than half of the active asset period. Taxpayer 2 ceased involvement in the partnership business within 12 months of the CGT event occurring.

Therefore you satisfy the active asset test under section 152-35 of the ITAA 1997.

Question 2

Under the small business 50% active asset reduction a capital gain can be reduced by 50% if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied. The basic conditions to be satisfied are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year, and

(b) the event would have resulted in the gain (apart from Division 152 of the ITAA 1997), and

(c) at least one of the following applies

· you are a small business entity, or

· you satisfy the maximum net asset value test, or

· you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership, and

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Basic condition (a)

This condition requires a CGT event to happen in relation to your CGT asset. A CGT asset includes any kind of property or legal or equitable right. The relevant CGT event would be the disposal of the asset which would trigger a CGT event A1.

A CGT event happened in relation to your CGT asset in the income year it was disposed of, therefore this condition would be satisfied.

Basic condition (b)

The CGT event resulted in a capital gain. Therefore this condition is satisfied.

Basic condition (c)

Section 328-110 of the ITAA 1997 says you are a small business entity for an income year (the current year) if:

· you carry on a business in the current year; and

· one or both of the following applies:

o you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million;

o your aggregated turnover for the current year is likely to be less than $2 million.

You carried on a business in partnership. Taxpayer 1 continued to operate the business during the income year in which the CGT event occurred as a sole trader. Taxpayer 1 maintained a 50% ownership interest in the asset during this time. The aggregated turnover of the business in the two income years prior to the CGT event was less than $2 million. Taxpayer 1 met the requirements of a small business entity as a sole trader in the income year in which the CGT event occurred.

Taxpayer 2 maintained 50% ownership interest in the asset during the income year in which the CGT event occurred. However, taxpayer 2 did not meet the requirements of a small business entity for that year as taxpayer 1 continued the business as a sole trader. However, taxpayer 2 may still satisfy basic condition (c) through the maximum net asset value test.

Under section 152-15 of the ITAA 1997 you satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6 million:

(a) the net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities connected with you; and

(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

Taxpayer 2 had a net asset value less than $6 million for the income year in which the CGT event occurred. Therefore, they also satisfy basic condition (c) in Subdivision 152-A of the ITAA 1997.

Basic condition (d)

This condition was considered in Question 1 where it was concluded you satisfy the active asset test.

Conclusion

You satisfy all of the basic conditions for relief under Division 152 of the ITAA 1997. As a result, you can apply the small business 50% active asset reduction.